By shorting the out-of-the-money
call, the options trader reduces the cost of establishing the bullish position but
forgoes the chance of making a large profit in the event that the underlying asset
price skyrockets. The bull call spread option strategy is also known as the bull call debit spread as a debit is taken upon entering the trade.

Limited Upside profits

Maximum gain is reached for the bull call spread options strategy when the stock price move above the higher strike price of
the two calls and it is equal to the difference between the strike price of the
two call options minus the initial debit taken to enter the position.

Max Profit Achieved When Price of Underlying >= Strike Price of Short Call

Limited Downside risk

The bull call spread strategy will result in a loss if the stock price declines at expiration. Maximum
loss cannot be more than the initial debit taken to enter the spread position.

The formula for calculating maximum loss is given below:

Max Loss = Net Premium Paid + Commissions Paid

Max Loss Occurs When Price of Underlying <= Strike Price of Long Call

Breakeven Point(s)

The underlier price at which break-even is achieved for the bull call spread position can be calculated using the following formula.

Breakeven Point = Strike Price of Long Call + Net Premium Paid

Bull Call Spread Example

An options trader believes that XYZ stock trading at $42 is going to rally soon
and enters a bull call spread by buying a JUL 40 call for $300 and writing a JUL
45 call for $100. The net investment required to put on the spread is a debit of $200.

The stock price of XYZ begins to rise and closes at $46 on expiration date. Both
options expire in-the-money with the JUL 40 call having an
intrinsic value of $600
and the JUL 45 call having an intrinsic value of $100. This means that the spread
is now worth $500 at expiration. Since the trader had a debit of $200 when he bought
the spread, his net profit is $300.

If the price of XYZ had declined to $38 instead, both options expire worthless.
The trader will lose his entire investment of $200, which is also his maximum possible
loss.

Note: While we have covered the use of this strategy with reference to stock options, the bull call spread is equally applicable using ETF options, index options as well as options on futures.

Commissions

For ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts (typically around $10 to $20) and varies across option brokerages.

However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker. Traders who trade large number of contracts in each trade should check out OptionsHouse.com as they offer a low fee of only $0.15 per contract (+$4.95 per trade).

Similar Strategies

The following strategies are similar to the bull call spread in that they are also bullish strategies that have limited profit potential and limited risk.

The Collar Strategy

Costless Collar (Zero-Cost Collar)

Bull Put Spread

Aggressive Bull Call Spread

One can enter a more aggressive bull spread position by widening the difference
between the strike price of the two call options. However, this will also mean that
the stock price must move upwards by a greater degree for the trader to realise
the maximum profit.

Bull Spread on a Credit

The bull call spread is a debit spread as the difference between the sale and purchase of the two options results in a net debit. For a bullish spread position that is entered with a net credit, see bull put spread.

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